EU-Russia gas relations face a number of challenges, most notably the fallout from the Ukraine crisis, the impact of plans for new Russian pipelines, and recent legal disputes between Gazprom and the European Commission. Marco Siddi writes that despite protracted disagreement on these three issues, the two sides’ interdependence makes it likely that gas trade will continue without major changes for the next 10-15 years, within the confines of EU market rules.

New infrastructural projects, legal disputes and frequent rows over the price of gas between Russia and Ukraine. Gas trade between the European Union and Russia is undergoing a period of swift developments and tensions. The wider context is not new: Russia is the main gas provider to many EU member states and depends on the European market for its gas sales, which constitute a substantial part of its export revenues (14 per cent of the total in 2013). This state of affairs is unlikely to change radically in the next 10-15 years: Russian state giant Gazprom has long-term contracts with numerous European companies, the price of Russian gas will most probably remain very competitive and the EU will need at least 100 billion cubic metres of it per year until 2030.

Within this context, there are several urgent challenges to EU-Russia gas trade. The most pressing one concerns Ukraine, which is both a highly vulnerable importer of Russian gas and a key transit country for Russian gas exports to European markets. Following the departure of Viktor Yanukovych from power in February 2014, Russia cancelled the discount on the price of gas that it had previously offered to Ukraine. This led to tense negotiations between the two sides until the following autumn, with the European Union as a mediator. Talks ended with a supply agreement valid until the summer of 2015.

Gazprom facility across the Moscow river. Credit: greg westfall / Flickr (CC BY 2.0)

Gazprom facility across the Moscow river. Credit: greg westfall / Flickr (CC BY 2.0)

Come autumn 2015 and Russia and Ukraine were back to the same dispute. The parties disagreed on the size of Ukraine’s price discount and the duration of the new deal. The EU frantically pushed them to negotiate. In late September, an agreement was reached: Russia will sell gas to Ukraine at a price of approximately 227 dollars per thousand cubic metres until 31 March 2016, with a discount of 20 dollars compared to Gazprom’s initial offer.

The EU committed to facilitating the financing of Ukraine’s purchases. Together with the World Bank and the IMF, Brussels will make 500 million dollars available for this purpose by the end of the year. The agreement is in everyone’s interest: Ukraine needs an additional 5 billion cubic metres of Russian gas to refill its underground storages before the onset of winter. This will also secure the uninterrupted transit of Russian gas to the EU in the coming months.

However, while Moscow negotiated with Kyiv over gas prices for the coming winter, it also took initiatives that should make Ukraine’s role in EU-Russia gas trade largely irrelevant in the medium term. At the moment, approximately 40 per cent of Russian gas exports to the EU flow through Ukraine. Gazprom is planning to expand an existing pipeline in northern Europe, Nord Stream, and build a new one in the south, Turkish Stream. Both will bypass Ukraine and free the company from dependence on Ukrainian transit pipelines. They will also deprive Ukraine of its gas transit revenues (3 billion dollars in 2014). According to the plans of Gazprom, the new scenario will be in place by 2019.

However, the implementation of the Russian blueprint will be far from easy. The European Commission is unlikely to be supportive: given the current tensions with Russia, it has little incentive to agree to new infrastructural projects involving Gazprom. Brussels knows that, if the expansion of Nord Stream and/or Turkish Stream are implemented, Ukraine will lose contractual power with Russia over its own gas imports. Moreover, the EU would need to build additional infrastructure to connect Turkish Stream (which is planned to end at the Greek-Turkish border) to European markets.

Economic and political issues are compounded by legal disputes. The European Commission and Gazprom are at odds over the implementation of the Third Energy Package, a set of regulations and directives adopted by the EU in 2009, requiring the unbundling of the production and distribution of energy. These rules challenge the business model of Gazprom, which includes both the production of gas and its distribution to European markets via pipelines in which the company holds a majority stake.

Before relations between the EU and Russia became tense due to the Ukraine crisis, Gazprom was able to secure an exemption from the Third Energy Package for the existing sections of the Nord Stream pipeline. In the current context, securing further exemptions (i.e. for the planned doubling of Nord Stream) will be much more difficult. Moreover, in April 2014 Gazprom filed a dispute concerning the Third Energy Package at the World Trade Organisation, arguing that the legislation discriminates against Russian natural gas pipeline transport services and service suppliers.

However, it is likely that Gazprom will have to come to an agreement with the European Commission and implement EU market rules, not least because the Russian company is under scrutiny for another related dispute, with potentially more serious consequences.

In September 2012, the European Commission launched an antitrust investigation against Gazprom, which is suspected of breaching Articles 101 (restricting or distorting competition) and 102 (abusing its dominant market position) of the Treaty on the Functioning of the European Union. The investigation concerns Gazprom’s business practices in several East-Central European member states, where the company is the main or the only gas supplier. Gazprom is accused of having promoted a divide-and-rule policy, which allows it to keep price differentials among neighbouring countries and impose unfair pricing.

Gazprom is likely to seek an amicable solution before the European Commission takes the case to court, where the Russian company – if found guilty – may be sentenced to pay a substantial fine, up to 10 per cent of its yearly turnover. Gazprom has the resources to adapt its business model to European legislation and continue to operate profitably in the European market.

On the other hand, the European Union will have to keep doing business with the Russian company, as its exports will remain highly competitive and hard to replace in the next 10-15 years. Meanwhile, European leaders should keep in mind that investing in renewables and energy efficiency is the best and cleanest strategy to reduce dependence on all imports of fossil fuels.

This article is based on a Briefing Paper published at the Finnish Institute of International Affairs

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Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.

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About the author

Marco Siddi – Finnish Institute of International Affairs
Marco Siddi is Senior Research Fellow at the Finnish Institute of International Affairs, where he focuses on EU-Russia relations. He was awarded a PhD in Politics at the University of Edinburgh.

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